High stakes: Unpublished research brings big profits and huge losses – to insider traders

Author: Paul Krzyzanowski, 02/14/13

Nature kicked off 2013 with an unsettling article about how privileged information from research studies is being used to garner gigantic returns for investors, large and small. It’s not surprising, considering that one of the most egregious cases of so called academic information being used for insider trading of stock in public companies, Elan and Wyeth, led to over a quarter billion dollars in gains. As a result of high profile cases of leaked information, some research centers are considering prohibiting researchers from consulting for financial firms altogether.

The current bellwether of leaked research information involves Sidney Gilman, based at the University of Michigan, and Mathew Martoma, a trader at SAC Capital. They met through the Gerson Lehrman Group, a consulting company that connects people in the financial industry to about 35,000 academics who are experts in diseases, technology, clinical trials, and other information that can drive investment decisions. Gerson Lehrman is one of many ‘expert network’ companies hiring researchers for as much as $1,000 an hour. In 2008, Gilman passed information on an Alzheimer’s drug clinical trial involving Bapineuzumab to Martoma, who was arrested by the FBI in late November 2012.

The New York Times published an excellent, yet intricate narrative of this case as a result of Gilman’s expert network consulting, describing his contributions to Alzheimer’s research and how he helped build Michigan into a hub for dementia research. Despite consulting through a legal business, Gilman’s errors in judgement precipitated a response from his academic colleagues that’s tantamount to banishment:

Dr. Gilman’s story is a reminder of the corrupting influence of money. The University of Michigan, where he was a professor for decades, has erased any trace of him on its Web sites, and is now reviewing its consulting policy for employees, a spokesman said.

The continuing fallout from this event is shifting the research field’s perception of financial consulting. Eric Campbell, who studies conflicts of interest at Massachusetts General Hospital in Boston, believes that “this is not something that doctors or researchers should be involved in.” In Ohio, the Cleveland Clinic has been reviewing financial consulting relationships with a lawyer since 2005 and is now considering an outright ban.

The fact that Gilman’s breach occurred through an expert network company is irrelevant. Full stop.”

However, the concern posed by Nature, which portrays expert network consulting as an ‘indulgence’ that universities tolerate, is almost as outrageous as proposing complete bans on this kind of networking and consulting. Curiously enough, the most levelheaded appraisal of the Gilman story comes from the University of Michigan, the very epicentre of this debacle:

The University of Michigan has severed its ties to Dr. Gilman and a spokesman, Pete Barkey, said the case was “caused by a faculty member’s unethical and illegal behavior during the conduct of external activities.”

The fact that Gilman’s breach occurred through an expert network company is irrelevant. Full stop. Most cases of insider trading that I’ve read about involve individuals failing to meet the ethical and legal obligations of their positions and leaking information that should have remained confidential.

To Gerson Lehrman’s credit, the firm has an extensive policy that consultants must abide by, which includes refusing work that puts them in a conflict of interest and not disclosing many types of confidential information, including material information about public companies. They even go so far as to include a provision to pay consultants full time for projects they had to terminate because of conflicts. So the temptation of additional consulting fees shouldn’t exist, at least if one isn’t acting on insider information independently. In that case no policies against external consulting would be useful.

The challenges facing expert consulting are even larger for the relatively small regenerative medicine industry, and institutes restricting consulting activities could deter researchers that are interested in translating science to commercial uses. Some medical researchers already believe consulting will help their fields: Nature quotes David Wazer, a radiation oncologist at Tufts, as being motivated by the potential of attracting investment flows to his field.

The challenges facing expert consulting are even larger for the relatively small regenerative medicine industry…”

Consultants in Gerson Lehrman are organized into fields and study groups, and the company has almost a thousand study groups under their healthcare segment. Many of these consist of physicians and surgeons organized by area of practice.

I found no groups explicitly involving regenerative medicine (the website only has nine hits with the term), but many researchers with expertise in similar areas, like bone marrow transplantation, can be found. Gerson Lehrman has also started to make a concerted push into the regenerative medicine field through participation with other organizations, so you can be sure they will be recruiting more regenerative medicine experts to their ranks in time.

Ultimately, I don’t think research institutions will do much good by building silos around researchers to protect them from financial consulting. Institutes should encourage the practice, among those who are willing, but should also be ready and willing to provide guidance and training to promote responsible and ethical behaviours among their staff.

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Paul Krzyzanowski

Paul is a computational biologist and writer living in Toronto. He's been a contributor to Signals for three years, writing articles for the general public about how biotechnology and biomedical research can be used to solve pressing medical problems. Alongside Paul's experience in computational biology,
 bioinformatics, and molecular genetics, he's interested in how academic research develops into real world, commercial technology, and what's needed for the Canadian biotech industry needs to grow. Paul is currently a Post-doctoral Fellow at the Ontario Institute of Cancer Research. Prior to joining the OICR, he worked at the Ottawa Hospital Research 
Institute and earned a Ph.D. from the University of Ottawa, specializing in computational biology. And finally, Paul earned an H.B.Sc. from the University of Toronto a long time ago. Paul's blog can be read at www.checkmatescientist.net
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